Bah humbug —

iPhone 5 discount wars lead to $65,000 in losses for Best Buy

Lower Walmart prices amount to coal in Best Buy's Christmas stocking.

The holiday battle over iPhone sales left Best Buy with $65,000 in losses, the company said on Friday. The Wall Street Journal cited Best Buy's claims as part of a piece on Walmart's advertising practices, pointing out that Best Buy was "compelled" to price-match Walmart's aggressive iPhone 5 discounts, leaving the big-box electronics retailer in the red.

Both chains offered up discounts on the iPhone 5 ahead of the 2012 holiday season—Best Buy started in early December with a $50-off offer, taking the lowest-end iPhone 5 down to $149.99. But Walmart was quick to follow with its own discounts, dropping the price to $127. (The WSJ claims Walmart advertised $150 for the iPhone 5, but the numbers posted on Walmart's Facebook page on the day of the promotion said $127.)

Because of Best Buy's price-matching guarantee, the retailer was essentially forced to offer the iPhone 5 at an even larger discount than it originally planned. This is undoubtedly not a new experience for Best Buy, but according to the WSJ, Best Buy (and other retailers) claim Walmart offered the steep discount without having much stock available. As such, Walmart allegedly only sold a limited number of iPhone 5 units at the discounted price, while other retailers ended up taking a major loss by price-matching.

In Best Buy's case, that loss amounted to $65,000 for the iPhone 5 alone—the company also claimed Walmart advertised that it carried a laptop for $251 less than Best Buy, but the two models were actually different, with varying specs.

Walmart, for its part, claims it sold plenty of iPhones "and that it was 98 percent in stock at stores that carried the devices," wrote the Journal, without giving any concrete sales numbers.

Promoted Comments

One thing I don't understand is why Best Buy was "compelled" to change their prices to match the Walmart sale price. The way I've always understood price matching policies was that if something was on sale somewhere else you had to tell the price match store the other price (and offer some kind of proof like a sale ad) and then you would get the competitors price. If Best Buy had just left their $150 price point up, they would probably have made money on 90% of the sales since lots of customers don't know about the price match policy or Walmart's better price. For the 10% of people that take advantage of the BB price match policy, Best Buy loses a bit of money on the sale but still probably comes out ahead with the ancillary purchases.

Oh and just to point it out, here is the "out of stock" part of the Best Buy price match policy...What if the competitor does not have the item in stock or has limited quantities of the product?Sometimes a retailer will advertise a product as having limited quantities in stock. If the item is out of stock or the competitor has advertised as limited quantities of an item, it is not eligible for price matching. Likewise, if Best Buy has a product that is advertised as being limited in quantity it will not be eligible for price matching. Source - http://www.bestbuy.com/site/Payment-Pri ... 4400050011

If the local Walmart(s) was out of stock, then Best Buy really didn't have to price match anyway according to their own policy.

Jacqui Cheng
Jacqui is an Editor at Large at Ars Technica, where she has spent the last eight years writing about Apple culture, gadgets, social networking, privacy, and more. Emailjacqui@arstechnica.com//Twitter@eJacqui

96 Reader Comments

And it's this sort of stupidity repeated over and over again that will do Best Buy in: they can't possibly compete against monsters like WalMart on price, and they certainly aren't providing service like Apple at their retail stores, combined often with staff lacking knowledge about what they're selling.

I have a friend who tried very hard to find the $127 iPhone 5 at about a dozen Walmart stores. Not a single one had the phone in stock and none of them had employees who could tell her how to get a raincheck to get the price honored later. It seems to have been more of an unfair PR stunt to me. I wish I'd known to tell my friend to go to Best Buy to get the price matched.

Full numbers aren't in, but they had something like $16 BILLION in sales in the 4th quarter. Somehow I don't think anyone cares about $65K.

Sales have nothing to do with profit. You can sell 100 billion in a year and lose 1 billion overall.

Too bad they just didn't do what Circuit City and the PC manufacturers did. Oh best buy has this HP-1234 for $xxx? Well even though this computer is identical, it's a HP-1234A so we can't price match it.

But their policy should have handled these situations if they actually got their stores to follow it- every retailer I ever worked at (including BBY) required the item in stock at the nearest retailer in order to price match, as well as exact item match, usually defined by model number and/or spec match. Beyond that, as others mentioned, BBY gets most of their computers, especially laptops as 'special' Best Buy Only models, even if the difference is the letter on the end of the number. As far as I am aware, this hasn't changed. But of course, it sounds better to investors if it's not your fault because big mean old Walmart was bullying you.

I recall stores doing an inventory check at local stores prior to price matching. Basically, if you showed up with WalMart's ad and tried to price match, they'd call the local WalMart to see if they had it in stock. No stock? Then technically you can't buy it at that lower price thus they wouldn't sell it to you at the lower price either.

Damage the price-matching competitors, throw in a whiff of bait and switch to boot. (Some people probably went for another deal or another handset entirely, while they were there.) Technically legal, if ethically challenged, and obviously effective.

Businesses created price match guarantees to bring customers into the stores. Then they started being sneaky and sold only brands they had available and not anywhere else, so that it was impossible to price match until the internet came along. Now they are still price matching, but a single monolithic product like the iPhone is easy to price match, and they get slapped upside the head.

The real question we'll never know is, did Walmart lose any money? How did either of these retailers manage discount iPhones at all? Apple is notorious for wanting their stuff all priced the same. And before you say that "Apple started discounting after Steve Died", best buy did this 2 years ago after the iPhone 4 came out and sold the iPhone 3GS free with activation, when it normally cost $99. this was well before Steve passed.

Damage the price-matching competitors, throw in a whiff of bait and switch to boot. (Some people probably went for another deal or another handset entirely, while they were there.) Technically legal, if ethically challenged, and obviously effective.

This is precisely what car dealerships do. "Buy a new car for $13K!* Come and get it!"

Walmart doesn't mess around when it comes to undercutting competitors, but this is the first time I've seen a big-box retailer groaning about Walmart forcing them to eat a loss. I think that BB's problem is that folks typically go there to buy one thing (and maybe a discount DVD on the way out) and leave, whereas at Walmart they can pull this "loss leader" thing because, "damn since im here I do need some toilet paper, drywall screws, and a new towel as well"

Full numbers aren't in, but they had something like $16 BILLION in sales in the 4th quarter. Somehow I don't think anyone cares about $65K.

Sales have nothing to do with profit. You can sell 100 billion in a year and lose 1 billion overall.

Too bad they just didn't do what Circuit City and the PC manufacturers did. Oh best buy has this HP-1234 for $xxx? Well even though this computer is identical, it's a HP-1234A so we can't price match it.

Ok smart guy...profit from Q4 isn't in and is more variable than revenue, but based on past quarters it'll be between 10 million and 300 million. $65K is still nothing.

And to be pedantic, revenue does have a relation to profit. Within a given sector, the ration of profit to revenue is likely to be within a certain band, and sales in the billions will give you profit that dwarfs $65K.

The real question we'll never know is, did Walmart lose any money? How did either of these retailers manage discount iPhones at all? Apple is notorious for wanting their stuff all priced the same. And before you say that "Apple started discounting after Steve Died", best buy did this 2 years ago after the iPhone 4 came out and sold the iPhone 3GS free with activation, when it normally cost $99. this was well before Steve passed.

Wal-Mart makes do on extremely low profit margins and extremely efficient operations. If their operating costs are lower than Best Buy's, then they may be able to cut an iPhone 5 by $73 dollars and still make money, whereas Best Buy's cut by $73 might actually lose them money.

I recall stores doing an inventory check at local stores prior to price matching. Basically, if you showed up with WalMart's ad and tried to price match, they'd call the local WalMart to see if they had it in stock. No stock? Then technically you can't buy it at that lower price thus they wouldn't sell it to you at the lower price either.

I guess they don't do that anymore?

EDIT: Opps! Beaten by Draxlith. Yeah, what he said.

That could have been the case and Walmart could have been telling employees for anyone that called about stock to always say "yes, it's in stock". That would get more customers in the store and they'd always be able to say they "just sold out". The side benefit would be hurting the profits of your competitors who are doing price-matching.

A good BB manager would send an employee over to the nearest Walmart. I'm sure that will be the policy coming down from corporate after this debacle.

Walmart doesn't mess around when it comes to undercutting competitors, but this is the first time I've seen a big-box retailer groaning about Walmart forcing them to eat a loss. I think that BB's problem is that folks typically go there to buy one thing (and maybe a discount DVD on the way out) and leave, whereas at Walmart they can pull this "loss leader" thing because, "damn since im here I do need some toilet paper, drywall screws, and a new towel as well"

It wasn't just Best Buy complaining. Toys R Us and others have a similar complaints.

What I see here is a lack of reading comprehension on the part of commenters.

Having worked in a regulated industry subject to disclosure rules set by the FTC, it's as plain as the nose on one's face to me that if Wal Mart is guilty of deceptive business practices, they eventually will get slapped down.

This is clearly not capitalism working for the benefit of the consumer. This is a historically predatory company trying to damage competition.

All you anti-government intervention types coming to the defense of Wal Mart, keep in mind this is a company that intentionally shorts employee hours so they qualify for Medicaid, food stamps, and costs the country billions in entitlement costs such as their employees costing hospitals money from unpaid emergency room visits. All to save a buck. Which, in reality, only saves themselves money, not their customers, in the big picture.

The whole point of being a loss-leader is taking a hit on something to get customers inside to spend money on other things, perhaps things they didn't plan on purchasing. So the question is, did they lose $65,000 on the iPhones by taking a $50 hit on 1300 of them or were they overall in the red $65,000 and blamed it all on the iPhones? Regardless, selling them cheaply got more people into their stores and could have possibly garnered them more sales than if they didn't have their price matching policy.

At the very least, if they have a problem with their own price matching policy - get rid of it! I mean honestly, why even have this policy if you're going to bitch about it the second you have to adhere to it? And to top that all off, it looks like BestBuy was the first one to move the iPhones to $50 off in December which would have affected every other retailer with a price matching policy.

Apologies for any additional facts in the article itself, the article either wouldn't load or is behind a paywall...

Rare? Every time a consumer is happy with a purchased product they are benefiting from capitalism, and every time a product is improved they are benefiting from competition, and combining the two leads to benefits from competitive capitalism.

IE, the entire reason Apple and Samsung have displaced HTC, Palm, Nokia, and RIM in smartphones is competitive capitalism.

BB can't compete on price, and apparently they're trying to make up for that with poorer customer service and a MUCH WORSE return policy (as in tracking ALL customer returns - even unopened with a receipt - by retaining Driver License forever info in a supposedly secure database). NO THANKS BB. Just shut down already, will ya.

Businesses created price match guarantees to bring customers into the stores. Then they started being sneaky and sold only brands they had available and not anywhere else...

Last time I shopped for a new mattress (probably eight years ago) this seemed to be the case. No two retail chains carried the same models, so price-shopping was thwarted. For something that people only buy once a decade or so, the retailers have the upper hand as far as rigging the system in their favor.

The whole point of being a loss-leader is taking a hit on something to get customers inside to spend money on other things, perhaps things they didn't plan on purchasing.

Best Buy wasn't selling the iPhone as a loss-leader though. I don't even think Best Buy knows what loss-leaders are. They weren't intentionally selling it at a price that caused them to lose money, but instead had to sell it at that price because of their price match guarantee.

Selling goods under value is only short-term benefits to the customer. Long-term, it leads to oligo- if not monopolies, because only the biggest dog can afford this ruinous business. In the end, everybody complains that the only place in town to go shopping is ...

I would like to point out that BestBuy was probably planning on MAKING money on their iPhone5's. It's not that they "only lost" $65k, but that they were probably hoping to earn millions of dollars on them, even at their discounted $150 price. If Best Buy lost an additional $23 on each unit, it only takes 44k units to lose a million dollars.

As another poster pointed out, typically you have to prove that the competitor has it in stock before they will price match. I'm curious whether BestBuy employees did not follow through with this. That makes their complaint that WalMart carried no stock null and void.

Other posters have also mentioned that you can carry slightly different skus to avert this issue, but I seriously doubt Apple would ever agree to this. Part of their ecosystem, and in my opinion a very good part, is that they carry a limited number of sensible skus.

As others have said (and sorry for the repeat), typical retail price match policy requires that the item be in stock *and* identical for the match to be valid. I used to have to make the verification calls all the time during my tenure in retail, and if both of those criteria didn't add up the price was NOT matched. Another problem I had was the discount offered by membership only places, which could not be price matched at all. There is a local discounter across the border in Oregon that has a $5 membership fee, which offered very steep discounts on lots of things that were similar to what I sold. Customers would always tell me that this place had the same item for $75 less and that they wanted the price, but the item almost always had a different manufacturer's part number, was out of stock, and then the membership only aspect clinched the un-deal for the customer.

All of BB's posturing and whining would tell me that they don't understand the changing game enough to stay in business for much longer.

So they lost some in revenue. They do that every time there is a sale. Why is it a story?

I agree that a $65k loss on a sale price is a pretty lame story.

But it's not true that there's a loss in revenue every time there is a sale. A sale may generate net positive revenue if volume increases to offset the reduced price. For instance, say you usually sell 100 widgets in a period at $50, for revenue of $5000. Now you put them on sale for $40. As long as volume increases to at least 126, it's a net increase in revenue.

The same is true of profit, as long as the sale price is still profitable. Let's say you usually netted $1000 on those 100 widgets, or $20 each. At the $40 sale price, you're only netting $10 each, but at long as you sell at least 201, it's a net gain in profit.

Sorry to be pedantic, but this stuff is worth knowing. A sale is not necessarily a net loss in revenue or profit.

Damage the price-matching competitors, throw in a whiff of bait and switch to boot. (Some people probably went for another deal or another handset entirely, while they were there.) Technically legal, if ethically challenged, and obviously effective.

This is precisely what car dealerships do. "Buy a new car for $13K!* Come and get it!"

*price reflects this *1* VIN only.

Bait and switch isn't illegal in the US? It is in Australia, and there have been reasonably recent court cases over it.

Damage the price-matching competitors, throw in a whiff of bait and switch to boot. (Some people probably went for another deal or another handset entirely, while they were there.) Technically legal, if ethically challenged, and obviously effective.

This is precisely what car dealerships do. "Buy a new car for $13K!* Come and get it!"

*price reflects this *1* VIN only.

Bait and switch isn't illegal in the US? It is in Australia, and there have been reasonably recent court cases over it.